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Maybe Jim Cramer Was Overmatched

publication date: Sep 17, 2020
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author/source: Brian Nelson, CFA
Dear members:
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Have you ever wondered why so many trust the TV for financial advice or stock tips? You guessed it: It comes back to "brain science" or the concept of familiarity. When we see a celebrity or our favorite stock guru on the television, it arouses our emotions and connects us with the idea, making the experience more memorable. The brain tends to treat our favorite newscaster or celebrity as a trusted, familiar friend, and therefore we translate those feelings into expertise and a "valid" endorsement.
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Probably one of the first types of celebrity branding came from trading cards in the late 1800s. The cards were given away in packs of cigarettes to heighten demand as consumers bought more to finish the entire sets of baseball cards. Things really took off in the 1930s, and Babe Ruth was probably one the most popular celebrity endorsers of that bygone era. From White Owl cigars to Old Gold cigarettes to Pinch-Hit tobacco to Raleigh cigarettes to Red Rock Cola and beyond, Babe Ruth was everywhere.
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In 1930, when asked by a reporter whether he thought it was right to be making more money than President Hoover, Babe Ruth responded, "Why not? I had a better year than he did." The people loved him, and at the time of the Great Depression, that touch of cockiness and humor was what people wanted. Corporations know the power of the celebrity advertiser, but we should be careful not to read too much into the stock tips given on TV. Think of business television as entertainment, nothing more nothing less.
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Back in 2015, Valuentum had its first run in with the potential hazards of celebrity influence when we published our work on the pipeline MLPs. Our thesis was picked up in Barron's.com and commented on in other media outlets from Benzinga to Seeking Alpha to S&P Global and across the sell-side community. We noticed a glaringly obvious mispricing across the MLP space at the time, and we pounded the table on our views. There were billions of retiree's investment dollars at stake resting on a terribly feeble foundation.
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The long and short of the story is that most pipeline MLP investors weren't paying attention to the concept of intrinsic value, as calculated by the enterprise valuation process (i.e. the discounted cash flow process). Most were focusing on distribution yield-based valuations and distributable cash flow, a misnomer not to be confused with discounted cash flow. Most analyses from our perspective were completely ignoring the growth capital outlays within the enterprise valuation context. You know the rest of this story.
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[As a side note, in late 2019, we had plans to start a CFA Society tour, but we weren't able to get started at CFA Chicago to save investors from another 50% decline since we reached out. COVID-19 derailed our efforts a bit since then, but we plan to continue to be active helping professionals.]
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Back to the story about celebrities. In late 2015, our publishing firm was blindsided by a hit piece from TheStreet, co-authored by none other than Jim Cramer, himself. He tried to dispel our concerns about Energy Transfer's ability to keep paying its distribution due to the size of its debt load. Those that know this story know that Energy Transfer subsequently merged and pursued a stealth distribution cut in November 2016. Since that article from TheStreet, Energy Transfer's shares have fallen over 50%, while the S&P 500 is up nearly 70%. Investors might have saved billions by heeding our warnings.
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Concluding Thoughts
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The important takeaway is to be careful out there--especially when it comes to listening to your favorite gurus on TV or on social media (especially on social media!). As humans, we tend to conflate popularity ("celebrity status") with expertise due to a familiar connection (i.e. that familiar face on TV), and this could be extremely hazardous to your retirement portfolio's returns.
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Einstein is credited with the saying "blind belief in authority is the greatest enemy of truth." Just like the important concept of enterprise valuation saved investors from the MLP collapse years ago, helped investors through the COVID-19 crisis and steered them clear of the worst of the quantitative "value" factor's performance in early 2020, understanding the in's and out's of the process will hands-down make you a better investor.
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Some might say Jim Cramer was overmatched. I don't think so. I just think he needs to read Value Trap! I hope you found this article helpful!
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Kind regards,
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Brian Nelson, CFA
President, Investment Research
Valuentum Securities, Inc.
brian@valuentum.com
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It's Here! 
The Second Edition of Value TrapOrder today!
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Tickerized for holdings in the AMZA.
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Brian Nelson owns shares in SPY, SCHG, DIA and QQQ. Some of the other securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.

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